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Thursday, April 10, 2008

Credit Losses and the Shape of the Recession

Equities the world over have bounced nicely, with the S&P 500 ‘melting up’ as high as 1390. This got the usual Bulltards out calling the bottom in ‘financials’, in ‘builders’ in ‘tech’ and even in the ‘economy’.

Subprime losses that have been BOOKED total $245 billion. This number is HUGE to be sure, but that does not mean it’s all priced in. Losses are expected to mushroom into the TRILLION dollar range.

Subprime Bank Losses Reach $245 Billion With WaMu, HSH: Table: “The following table shows the $245 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 70 of the world's biggest banks and securities firms.

Washington Mutual Inc., the largest U.S. savings and loan, said this week it will set aside $3.5 billion because of expected losses on home loans during the first quarter. HSH Nordbank AG, a state-owned German bank, said yesterday it wrote down 1.3 billion euros ($2 billion) last year.

The charges stem from the collapse of the U.S. subprime- mortgage market. The figures, from company statements and filings, also reflect some credit losses or writedowns of mortgage assets that aren't subprime as well as charges taken on leveraged-loan commitments.

Only writedowns and provisions that have filtered through to the income statement are included. Asset value reductions that some banks preferred to keep on their balance sheet and not charge against earnings are excluded.

All numbers are in billions of U.S. dollars, converted at today's exchange rate if reported in another currency. They are net of financial hedges the firms used to mitigate losses.”

Goldman Sees Credit Losses Totaling $1.2 Trillion: “Goldman Sachs forecasts global credit losses stemming from the current market turmoil will reach $1.2 trillion, with Wall Street accounting for nearly 40 percent of the losses.

U.S. leveraged institutions, which include banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday.

Losses from this group of players are crucial because they have led to a dramatic pullback in credit availability as they have pared lending to shore up their capital and preserve their capital requirements, they said.

Goldman estimated $120 billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer.”

Goldman Sees Subprime Cutting $2 Trillion in Lending (Update5): “The slump in global credit markets may force banks, brokerages and hedge funds to cut lending by $2 trillion and trigger a “substantial recession” in the U.S., according to Goldman Sachs Group Inc.

Losses related to record home foreclosures using a “back- of-the-envelope” calculation may be as high as $400 billion for financial companies, Jan Hatzius, chief U.S. economist at Goldman in New York wrote in a report dated yesterday. The effects may be amplified tenfold as companies that borrowed to finance their investments scale back lending, the report said.”

There is no way ANYTHING has bottomed. In fact, the slide down is about to ACCELERATE. This won’t be one a quick and shallow recession. This not a ‘V’ shaped recession. This almost certainly is a ‘U’ shaped or ‘L’ shaped recession with a very real possibility of a ‘\’ shaped damn near PERPETUAL recession.

Related Posts:
A + B = \
Case for an “L” Shaped Recession


ams5995 said...

from 2000 to 2008 the derivatives market went from 100 trillion to over 500 trillion. there is 45 trillion in derivatives in housing and that will probably collapse if you are right. if that collapses who knows what else will collapse?

scott said...

i believe we are about to see counterparty risk and the corresponding CDS spreads rip through the system. I still think the IMF figure is a real low-ball estimate.

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